March 1 (Bloomberg) -- The Chilean peso fell the most since April against the dollar, the biggest fluctuation of any major currency today, on speculation higher yields on U.S. Treasury notes will diminish the appeal of peso-denominated debt.

Against the dollar, the peso dropped 1.65 percent to 584.25 at 2:49 p.m. in New York, matching its decline on April 21. The currency of South America's fifth-largest economy has weakened 4.9 percent since the end of last year, making it the second- worst performer against the dollar.

``The differential in rates will benefit the U.S.,'' said Carlos Olivares, who helps manage $9.8 billion at AFP Cuprum SA, Chile's third-biggest pension fund, in Santiago. Chilean policy makers will probably lift their 2.75 percent benchmark rate at a slower pace this year than the Federal Reserve, he said.

Chilean central bank two-year peso notes yielded 4.20 percent at 2:23 p.m. in Santiago, 63 basis points, or 0.63 percentage point, more than two-year U.S. Treasury notes. The gap, or spread, in yields has narrowed from 1.30 percentage point on Jan. 3, according to data compiled by Bloomberg.

``The fundamentals in Chile are very strong, but we do see the interest-rate differential going against the peso,'' said Alberto Ramos, senior Latin America economist at Goldman Sachs Group Inc. in New York.

Fed policy makers may lift their target rate for overnight loans between banks to 3.75 percent by year-end, from 2.5 percent, according to the median forecast in a Bloomberg survey of 70 forecasters published on Feb. 9.

Copper Declines

Chile's peso also fell today as prices for copper, Chile's biggest export, dropped from near a 16-year high in New York on concern manufacturers will slow purchases of the metal. Copper futures for May delivery fell 3.4 cents, or 2.3 percent, to close at $1.4645 a pound today on the Comex division of the New York Mercantile Exchange.

``With commodity prices coming off, currencies reliant on commodities are going to weaken, and that includes the Chilean peso,'' said Flavia Cattan-Naslausky, a strategist at Royal Bank of Scotland Plc in New York. She forecasts the peso will drop to 600 per dollar by the end of the year.

Chile exported $14.35 billion of copper last year, accounting for 45 percent of its overall exports. Copper prices have climbed on rising demand from China, the world's biggest user of the metal. The peso gained 6.7 percent last year.

Copper prices have more than doubled from a 14-year low of 60.35 cents a pound in 2001, increasing the flow of dollars into Chile, which is the world's biggest copper producer. The peso in 2003 surged 22 percent against the dollar, its best performance since at least 1986, according to data compiled by Bloomberg.

Chinese Trade Accord

Chilean President Ricardo Lagos has sought a trade accord with China to help boost his country's exports. The two countries on Jan. 26 began talks aimed at reducing tariffs on $5.4 billion of trade. Chile is the only country in South America with a free trade accord with the U.S.

Strong demand for copper, along with Chile's fastest economic growth in 2004 in seven years, may bolster the peso against the dollar this year, Olivares said.

Chile's $72.1 billion economy will grow as much as 6.25 percent this year, the Chilean central bank forecast on Jan. 19. Last year, the economy grew 5.9 percent. Exports account for more than a third of the country's economy.

Export growth may spur the peso to 550 per dollar this year, said Julio Eugenio Espinoza, an analyst at brokerage BICE Corredores de Bolsa in Santiago.

The world's biggest movers are based on changes in price and are screened for the size of the market and amount of daily trading.

To contact the reporter on this story: Heather Walsh in Santiago, Chile hlwalsh@bloomberg.net

Last Updated: March 1, 2005 17:46 EST